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MAP Insights Column in the INQUIRER 29 January 2013

BIR Releases Transfer Pricing Rules

By: Dick Du-Baladad

Hear Ye! Hear Ye! The long awaited transfer pricing regulations (Revenue Regulations No. 22013) were released by the Bureau of Internal Revenue (BIR) last Friday, 25 January 25 2013.
The importance of this transfer pricing regulations (TPR) could not be overemphasized
especially at this time when the country is proving to be an attractive destination for foreign
investments. To a great extent, the TPR provides a semblance of stability in tax rules, a very
important consideration before investors finally decide to invest in a country. On the part of the
government, it ensures collection of its fair share of revenues generated in the country.
The TPR adheres strictly to the arms-length rule. It demands that transactions between or
among related parties must be comparably priced with those transacted between unrelated parties. In
short, the terms and the price agreed upon between related parties must be that which would have
been arrived at had the parties been independent. This is the whole essence of the transfer pricing
Thus, the TPR prescribes uniform guidelines and methodologies in determining the armslength price. These are the widely and internationally accepted OECD (Organization for Economic
Cooperation and Development) methodologies such as the comparable uncontrolled price, the resale
price, cost-plus, profit split and the transactional net margin methods. Since transfer pricing rules in
one country may impact on the revenue share of other taxing jurisdictions, necessarily, the rules have
to be aligned to prevent double taxation.
As emphasized in the regulations, the BIR does not have a preference for a specific method,
rather, it adopts the best method rule meaning, the method that gives the most reliable measure of
an arms-length price should be used. Thus, the availability and the quality of data to be used for
purposes of proving its comparability with independent transactions is crucial in determining the best
As to the kind and source of data, the TPR does not make a specific limitation or
differentiation. Foreign-sourced data as well as locally-sourced data may be used and are of equal
value. What matters is the degree of comparability and the quality of data from independent
Understandably, the determination of the arms-length price is the easier part but convincing
the BIR to accept and agree to it during examination is the harder part.

As a solution to this, the regulations offer two alternatives to avoid transfer pricing disputes:
the Advance Pricing Agreements (APA) and Mutual Agreement Procedures (MAP). The APA is an
agreement with the BIR fixing in advance the transfer price of future transactions. The MAP, on the
other hand, is an agreement between or among states to mutually arrive at an acceptable transfer
price. A more detailed procedure for availing these facilities has yet to be issued by the BIR.
The transactions to be covered by the TPR include sale of goods, provision of services,
financing arrangements, royalty agreements, cost-sharing arrangements and the like, as long as it
qualifies as a related-party transaction under the regulations.
A related-party transaction is one where a party to the transaction participates directly or
indirectly in the other company in any of three areas management, control or capital. Likewise, if
the parties are controlled, managed or owned by the same person or entity, these are considered
related or associated. Control pertains to any kind of control, whether direct or indirect, legally
enforceable or not, and however exercised.
Notably, the thin capitalization rules which was in the old exposure draft is not carried in
these regulations. Likewise, the presence of a 30% ownership to presume control as contained in the
exposure draft has been dropped. But the TPR clarifies that if income and deductions are arbitrarily
shifted between or among related enterprises, control is presumed.
The TPR is prospective in application and will take effect 15 days following its publication in
a newspaper of general circulation. Transactions entered into prior to its effectivity shall continue to
be governed by the rules prevailing at the time the controlled transactions were entered into.
In the case of continuing transactions under a single contract entered into prior to the TPR
(such as royalty agreements, contract for services, financing arrangements), there may be a split
treatment whereby transactions prior to TPR shall not be disturbed but payment of fees, interest or
royalties after the TPR may have to be reviewed and adjusted to comply with the new rules.
It is important to note that the BIR requires contemporaneous documentation. This means
that a transfer pricing study or document proving the use of an arms-length price must exist at the
time the taxpayer develops or implements a related-party transaction. The taxpayer must be able to
produce it when the tax returns are prepared and when asked during investigation.
These documents are not required to be attached to the tax returns upon filing. But like the
books of accounts, these are required to be preserved and kept by the taxpayer for at least 3 years
counted from the filing of the tax return.
Transfer pricing studies take time considering the availability of comparable data to be used
and considering further that this is the first time of its implementation. Thus, for taxable year 2013, it
is adviseable to start making the preparations this early in time for the tax audit which normally
comes one year after the filing of the returns. It is not yet clear whether transfer pricing audits would
be conducted as a special audit or as part of the yearly regular audits.

(The author is the Chair of MAP Tax Committee and the managing partner and CEO of Du-Baladad
and Associates. For inquiries, you may email dick.du-baladad@bdblaw.com.ph.)